Temporary allocation of troubled airline’s slots to competitors may have an impact on their cash flows

The temporary shutdown of Jet Airways may have enabled other airlines to raise their fares because of the gap in demand and capacity, seize premium slots at the Mumbai and Delhi airports, and operate more flights on the most-profitable routes.

But uncertainty surrounding Jet Airways’s fate is no cause for celebration for its competitors, and poses several challenges.

The Ministry of Civil Aviation announced that a slot allocation committee comprising the Airports Authority of India, airport operators and airlines, will re-distribute Jet Airways’s 440 slots at two of the busiest airports for a period of three months.

As Jet Airways began to cancel its flights, competitors like SpiceJet, IndiGo, Vistara and GoAir announced as many as 100 new flights from Delhi and Mumbai. But along with allegations of one airline being shown undue preference, there are also questions about whether these temporary slots make strategic sense for airlines.

“Around 60% of traffic has a metro city at one end. But most of these metros like Mumbai, Delhi, Bengaluru, Hyderabad and Chennai either don’t have any slots available or have exhausted those that generate higher revenue for airlines. So, Jet Airways’ slots represent a significant value for airlines acquiring them. But their temporariness means airlines will not be able to sell this beyond three months, impacting their cash flow. Moreover, if Jet Airways is returned these slots, the airlines will have to re-deploy their planes on non-metro routes,” says Satyendra Pandey, ex-head of strategy at GoAir. He says that the government has not ‘thought through’ the decision to provisionally re-distribute Jet Airways slots.

‘Govt. making a mess’

“The government is weaving something that will be messy to get out of. It is either indulging in double-speak or figuring things out as we go, because whoever pumps money into Jet Airways would want to start selling tickets immediately, but will not be able to do so without available slots,” he adds.

The re-allocation of the airline’s slots was necessitated due to a mismatch in passenger demand and available flights, caused due to the grounding of the third-largest airline in the country by fleet size. According to ICRA, the gap led to a ‘30-40%’ increase in airfares as compared to September 2018. This forced the government to step in.

By March end, an airline with a fleet size of 123 aircraft was left with merely 35 aircraft. With airfares spiralling out of control, the growth in domestic passenger trips, among the fastest globally, flattened out, recording a mere 0.14% rise. This was a sharp fall from double-digit growth figures over the past five years.

Combined with the grounding of 12 of SpiceJet’s Boeing 737 MAX 8 after the Ethiopian Airlines crash, the domestic aviation market saw 135 of the nearly 670 aircraft going kaput, i.e. a 20% fall in seats available for passengers. While a rise in airfares is good news for airlines that are constantly under-cutting themselves in a fiercely-competitive market, industry watchers say that in the long term, higher airfares can drive passengers away from air travel.

“Increase in airfares due to a sudden fall in capacity is expected to have a short-term positive impact on RASK [revenue per available seat kilometre] by the operating airlines,” says Manish Raniga, an independent aviation expert and former vice-president of Jet Airways.

Air travel unaffordable

However, it comes at the expense of the customer. Air travel in the current climate has become less attractive and an unaffordable mode of travel for all customer segments, corporate or leisure, he says. In the past, capacity growth by airlines has benefited the customer through connectivity, choice and convenience, he adds.

“The higher levels of pricing is unsustainable and will impact demand until such time that capacity growth meets demand at the right price point,” Mr. Raniga says.

Civil Aviation Secretary Pradeep Singh Kharola says the shortfall in capacity and a spike in airfares are being addressed, and airlines have shared an induction plan of 31 planes over a period of three months between March and May. However, it is evident that airlines will not be able to entirely replace Jet Airways in a short period of time.

Spike in input costs

Apart from staring at the prospect of losing customers to other modes of transport, airlines could also see a spike in input costs as vendors of Jet Airways readjust their margins to make up for lost revenue. Additionally, various carriers like IndiGo, SpiceJet and Vistara may be forced to tweak their plans to introduce new international routes as they see an opportunity to capture the domestic market.

But what has steered the downfall of Jet Airways and why are most airlines seeing a slump in their profits?

Amrit Pandurangi, a former consultant at Deloitte blames the tendency of airlines to snatch passengers away from competitors by wooing them with ultra-low airfares. “The airlines have behaved very poorly in terms of under-cutting airfares. So, when the going was good and crude oil prices were low they were fine, but when costs went up, they began to realise their mistakes. They are literally living on thin margins. Instead of wooing passengers with rock bottom fares, they need to manage their cost structures,” Mr. Pandurangi says.